Tag Archives: Risk Reversal

Options Trading Strategies: Risk Reversal

June 17, 2010   admin   No comments

Yesterday we saw options traders position for decent upside in wireless semiconductor company Qualcomm (QCOM) by purchasing 14k October 40 calls combined with the sale of 14k October 30 puts, otherwise known as a risk reversal. The options trader paid $0.66 (total proceeds of $924,000) for the 14k October 40 calls and collected $1.01 (total proceeds of $1,414,000), thus in aggregate collecting $0.35 ($490,000) for the trade. Within this risk reversal strategy, options traders benefit greatly if shares of QCOM trade above the $40 level upon October expiration.  Options traders begin to lose with shares of QCOM trading below $29.65 upon October expiration. The graph below highlights the P/L of the October 30-40 risk reversal options trade in QCOM:

As can be seen in the graph, not only does this options trader profit with shares of QCOM trading above the $40 level at October expiration, but the options trader also profits from the strategy as long as shares trade above the $30 level at October expiration (keeping the $0.35 collected at trade inception). That being said shares of QCOM would need to decline over 15% from current levels in the next 4 months for the risk reversal P/L to dip into negative territory. Seems like a pretty good risk/reward setup for options traders carrying a positive bias on QCOM over the next few months. For more information on the risk reversal and other options trading strategies visit OptionsUniversity.com.

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